The Organization of the Petroleum Exporting Countries faces a difficult task on Wednesday when the 14 members of the oil-producing group gather to complete a preliminary agreement reached two months ago.

OPEC outlined a deal in late September to target production at between 32.5 million and 33 millions barrels a day, setting an end-of-November date to hash out details. Prices since then have gyrated in response to waxing and waning expectations for a final agreement, with moves often driven by the latest pronouncements by major players.

‘This is the most difficult OPEC meeting in decades, because they are starting from scratch.’
James Williams, WTRG Economics

“This is the most difficult OPEC meeting in decades because they are starting from scratch,” said James Williams, energy economist at WTRG Economics. “It is not just an adjustment to current quotas because individual members have not had or needed one for years.” OPEC’s last output cut was announced in December 2008.

Indeed, the difficultly of that undertaking has been apparent in the weeks since the preliminary pact, with various oil producers voicing support for the deal on one day, but then sounding unwilling to cooperate on another. Estimates on the group’s collective output have also shown that OPEC has raised output to record levels, with the International Energy Agency pegging production at 33.83 million barrels a day in October.

“After months of uncertainty and speculation, you would think there will be some clarity about the crude-oil situation just days ahead of Wednesday’s OPEC meeting,” said Fawad Razaqzada, technical analyst at Forex.com, in a Monday note. “Well, you would be wrong. In fact, very wrong.”

Last week, The Wall Street Journal reported that Saudi Arabia was backing an effort to make the steepest oil-production cuts possible at the meeting and hoping to convince non-OPEC producers to help remove almost 2% of the world’s oil supply.

Oil prices are set to “move wildly in a generally supportive environment, but inside a market structure that is characterized by lots of false moves and indecisive price action,” said Razaqzada. “Expect to see further choppiness until at least Wednesday, unless OPEC’s next move becomes clear one way or another before the actual meeting.

5 crucial issues

Here’s a rundown of the five major issues OPEC must deal with to reach a final agreement, according to WTRG’s Williams:

1) Establish an overall quota

OPEC set a production target range at its September meeting, but Saudi Arabia has suggested a target closer to the lower-end of the range—32.5 million barrels.

2) Assign an individual quota to each member

Iran and Iraq have been unwilling to cut production in conjunction with other members. They rank as the cartel’s second- and third-largest producers. Iran has said it wants to boost production back to pre-sanction levels before it considers participating in an output deal and Iraq insists it needs its oil revenue to help rebuild and to fight against ISIS.

3) Agree on a source of production data for monitoring purposes

Iran claims to be producing about 600,000 barrels a day more than OPEC’s secondary sources, which include the International Energy Agency and media reports, estimate, said Williams. If it participates in an OPEC deal, it wants its quota based on 4.1 million to 4.2 million barrels a day of production, he said, in line with its pre-sanctions production levels.

“If OPEC does that, and then uses the secondary sources to monitor production, then it would allow Iran to increase production by another half a million barrels a day from its present level, Williams said.

4) Determine how to adjust quotas based on output of Libya and Nigeria.

OPEC members Libya and Nigeria want to be kept out of any output deal as they continue ramping up output in the wake of oil-related disruptions from internal conflicts.

In October, Libya’s output rose by 150,000 barrels a day to 510,000 barrels a day, while Nigeria added 180,000 barrels a day to 1.57 million barrels, according to the IEA.

5) Gauge the response by U.S. shale producers

Potential loss of market share has been a key concernsfor OPEC, particularly with the surge in U.S. shale oil production in recent years. President-elect Donald Trump’s policy measures aimed at removing regulations and boosting potential output are a complicating factor.

Deal or no deal?

Given all of that, analysts highlighted two of the most likely outcomes for the meeting:

1) OPEC reaches an agreement to curb production

A production cut or freeze will be “good news in the short term,” said Razaqzada.

An output cut may lift prices for Brent
UK:LCOF7
and West Texas Intermediate
CLF7, +1.06%
crude to, at the very least, their respective 2016 highs of $53.70 and $51.90 a barrel, he said. But a cut “would probably not have a long-lasting impact.”

“The oil market will still remain oversupplied because OPEC and Russia aren’t going to reduce oil production significantly from these record-high levels,” said Razaqzada. And potential price gains in the short term will likely be “capped in the medium term by expectations or a renewed rise in oil production in the U.S.,” he said.

Still, Ann-Louise Hittle, principal analyst at Wood Mackenzie, said she believes that if the cartel does actually cut production, the oil market will become ”tighter” in the first half of 2017. The deal, however, may only be six months in duration, which will raise uncertainty about the second half of next year, she said.

And what if OPEC reaches a pact but doesn’t stick to its quota? There’s likely to be a “period of increased volatility in oil prices, especially since OPEC spare capacity is seen to be “diminishing and infighting weakens credibility,” said Hittle.

2) OPEC fails to reach an output agreement

In a recent note, Michael Wittner, head of oil research at Société Générale, said that under this scenario, he would probably revise his 2017 price forecast “significantly downward.”

“Without an OPEC cut, the global rebalancing [of supply and demand] will progress much more slowly then previously expected and be pushed beyond next year,” they said. Currently, Société Générale forecasts WTI at $54.75 and Brent at $56.25 for 2017.

Wittner said its a “50-50 tossup” when it comes to whether OPEC will agree to cut output or not on Wednesday.

“The bottom line is that OPEC negotiations can be messy, and the outcomes can also be messy,” he said. “The range of outcomes is much more than ‘deal or no deal’—it is not black and white but rather with many shades of gray.”

“If there is a deal, the question for markets will be whether it is a strong deal or a weak deal and this will be determined by the level of detail announced by OPEC,” said Wittner.

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